What Should You Do with Old Job's 401(k)?

Dear Dr. Don, My daughter has a 401(k) with a company for which she used to work. She is undecided as to whether she should roll it into her current employer's 401(k) or roll it into an individual retirement account. She said her current employer's match is very small, and she has been told that the IRA is a better deal for her at 27 years old. What do you think? -- Lynn Layout

Dear Lynn, The key factors in the decision process are investment choices, account fees and expenses, and tax considerations. It's common for the ex-employee to want to move the money from his or her previous employer's plan, but it can make sense to keep it where it is if the plan has low costs and attractive investment options.

I have some money in a 403(b) plan from a former employer I haven't worked for in a dozen years. I kept the money there because it gave me access to mutual funds that I wouldn't have in a retail IRA account.

Full disclosure, I have another employer's 403(b) plan money in a rollover IRA, but I moved it years after I left the employer. I moved it because of a change in the plan's custodian, not because of the different investment options available to me in the rollover IRA account.

I don't recommend moving the money into the new employer's plan unless that plan offers something compelling in terms of investment choices or low annual fees and expenses. The company isn't going to match a rollover contribution, so that's not a decision variable.

If your daughter can afford to pay the income taxes that would come due in converting the funds from a tax-deferred retirement account to a Roth IRA account and pay them out of savings rather than out of the account, a Roth IRA rollover account can be the right choice. That is, unless she's holding company stock in the previous employer's plan. In that case, she should seek professional tax advice before moving the funds anywhere.

She has to qualify for the rollover into the Roth IRA. If she doesn't qualify, she may face the intermediate step of rolling the money into a traditional IRA and then converting it to a Roth IRA.

The investment choices, fees and expenses should be the same for a traditional IRA account or a Roth IRA account at the same custodian. She needs to decide how she wants to invest the money before deciding on a custodian. Custodians are banks, brokerage firms and mutual fund families. She can change custodians at a later date if she wants to change where the money is held or how the money is invested.

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